2. The Role of the FCA and the PRA

Question 1

2.1.1 What is the FCA’s Strategic Objective and their 3 Operational Objectives?

Answer 1

Strategic - Ensuring that financial markets work well
Operational:
- Securing an appropriate degree of protection for consumers
- Protecting and enhancing the integrity of the UK financial system
- Promoting effective competition in the interests of consumers in the markets for regulated financial services or services provided by an RIE in carrying on regulated activities in respect of which it is exempt from the general prohibition

Question 2

2.1.1 What should the FCA regard when considering an appropriate degree of protection? (6)

Answer 2

• the different degrees of risk in different kinds of investment
• the differing levels of experience and expertise of consumers
• the need for the timely provision of info and advice that is accurate and fit for purpose
• the provider should provide consumers with an appropriate level of care regarding the risk investment or other transaction and the capabilities of the consumers in question
• the differing expectations consumers may have in relation to differing investments or other transactions
• the general principle that consumers should take responsibility for their decisions

Question 3

2.1.1 What is the ‘Integrity of the Financial System’? (5)

Answer 3

• soundness, stability and resilience
• not being used for a purpose connected with fin crime
• not being affected by behaviour that amounts to market abuse
• the orderly operation of the financial markets
• the transparency of the price formation process in those markets

Question 4

2.1.1 How do the FCA regard ‘effective competition’? (5)

Answer 4

• the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices
• the ease with which consumers who may wish to use those services, including consumers in areas affected by social or economic deprivation, can access them
• the ease with which consumers who obtain those services can change the person from whom they obtain them
• the ease with which new entrants can enter the market
• how far competition is encouraging innovation

Question 5

2.1.1 Which part of the FSMA empowers the FCA to make rules that are legally binding on authorised firms concerning regulated and unregulated activities?

Answer 5

Part 10
Such rules must appear to the FCA to be necessary or expedient for the purpose of advancing one or more of its operational objectives

Question 6

2.1.1 What are the secondary objectives of the FCA and PRA following the Royal Assent of FSMA 2023?

Answer 6

• To facilitate the international competitiveness of the UK economy and its medium to long term growth, subject to aligning with relevant international standards

Question 7

2.1.1 How is the FCA held accountable for its objectives? (5)

Answer 7

• Annual Report - to the treasury
• Audit - by the National Audit Office
• Rules - how they relate to the statutory objectives
• Judicial review - FCA can be challenged by the courts
• Regulatory failure - FCA held accountable if it does poor work

Question 8

2.1.2 What are the PRAs 3 statutory objectives?

Answer 8

1. A general objective to promote the safety and soundness of the firms it regulates
2. An objective specific to insurance firms to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policy holders
3. A secondary objective to facilitate effective competition

Question 9

2.1.2 What are the 3 approaches the PRA uses to advance its objectives, using both regulation and supervision?

Answer 9

1. A judgement based approach (PRA relies heavily on this)
   
   • using judgement to determine whether a financial firm is safe and sound, whether insurers provide appropriate protection for policyholders, and whether firms continue to meet the threshold conditions
2. A forward looking approach
   
   • assessing not only against current risks but also against those that could plausibly arise in the future. When the PRA judges it necessary to intervene, it will generally aim to do so at an early stage
3. A focused approach
   
   • focusing on those issues and those firms that pose the greatest risk to the stability of the UK financial system and policyholders

Question 10

2.1.2 How does the PRA make an assessment of the net risk any given firm poses to their objectives?

Answer 10

Start by assessing gross risk. This is done by measuring the potential impact a firm has on the stability of the UK fin system and the external context and business model risk which a firm is exposed to. This is then overlaid with mitigating factors which are the actions a firm takes to offset the gross risk

Question 11

2.1.2 What powers does the FSMA grant to the FCA and PRA, other than rule-making powers?

(Note: PRA powers only extend to PRA-Authed firms)

Answer 11

• Grant auth to persons applying for Part 4A permission, vary a firm’s permission, and cancel authorisation
• Supervise authed persons on an ongoing basis to ensure that they continue to meet the regulators’ authorisation requirements and that they comply with the Handbook rules and other regulatory obligations
• Employ a range of disciplinary measures and sanctions to punish or limit the activities of firms that fail to comply
• Enforce the regulatory framework - the general approach is one of credible deterrence, using enforcement strategy as a tool to change behaviour in the industry

Question 12

2.1.2 What powers does the FCA have in regards Rule-making with respect of their Regulatory Authority?

Answer 12

FSA 2012 allowed FCA to publicly announce it has begun disciplinary action against a firm or individual. It can publish details of a warning notice proposing disciplinary action

Question 13

2.1.2 What powers does the PRA have in regards Rule-making with respect of their Regulatory Authority?

Answer 13

PRA prefers to use powers to secure ex-ante remedial action (before anything happens)
PRA has the powers to impose financial penalties and publish censures for cases when sanctions are inappropriate. It can also use powers when directions or restrictions are ignored by firms

Question 14

2.1.2 In which cases do PRA use its disciplinary power? (3)

Answer 14

• Reinforcing the PRA’s objectives and priorities
• changing and promoting high standards of regulatory behaviour
• sending a clear signal to a firm (and to the regulated community) about the circumstance in which the PRA considers a firm’s behaviour to be unacceptable, and deterring future misconduct

Question 15

2.1.3 What are the 8 principles of good regulation?

Answer 15

1. Efficiency and economy
2. Proportionality - mainly determined by a cost-ben analysis
3. Sustainable growth
4. Consumer responsibility
5. Senior management responsibility
6. Recognising the differences in the businesses carried on by different regulated persons
7. Openness and disclosure - they should publish relevant market info about regulated persons or have them publish it
8. Transparency - why they are making regulatory decisions

Question 16

2.2 What are the 12 Principles for Businesses (PRIN)?

Note: Firms will be liable to disciplinary action for breaking these but the FCA must prove the firm has broken them

Answer 16

1. Integrity
2. Skill, care and diligence
3. Management and control - of all affairs and risk
4. Financial Prudence
5. Market Conduct
6. Customers’ interests
7. Communications with clients
8. Conflicts of interest - both between itself and customers, and customers and other clients
9. Customers: Relationships of trust - info must be suitable for customers who rely upon the firms judgement
10. Clients’ assets - adequate protection while the firm is responsible for assets
11. Relations with regulators - must be open and cooperative
12. Consumer duty - deliver good outcomes for retail customers

Question 17

2.2 What is the difference between a customer and a client in the FCA definition?

Answer 17

A client can be a variety of parties doing business with the firm, including professional counterparties. The term customers applies, very broadly, to those clients who are not professionals and who may, therefore, need protection

Question 18

2.2.1 What were the predecessors of the Consumer Duty called? (2)

Answer 18

Treating Customers Fairly (TCF)
Fair Treatment of Customers (FTOC)

Question 19

2.2.1 When did the Consumer Duty come into effect?

Answer 19

31 July 2023 for new and existing products or services that are open to sale or renewal

31 July 2024 for closed products or services - they are only available to existing customers but without the ability to make new investments, and/or the services and products are being wound down

Question 20

2.2.1 What is the scope of Consumer Duty? (6)

Answer 20

Applies to products and services offered to retail customers - i.e.:

-Consumer Credit (CMCOB & FPCOB)
-Deposit-Taking activities (BCOBS)
-Consumer, micro-enterprises, charities with a turnover of less than £1million and natural person acting a capacity as a trustee if acting for purposes outside their trade, business or profession
-Insurance (ICOBS) - not reinsurance
-Investments (COBS)
Apply to business conducted with a customer who is not a professional client
The Duty will not apply to customers who elect to be treated as ‘professional clients’ - but the Duty will apply to the process that a firm uses to determine a clients status
-Mortgages (MCOB)
Regulated mortgages are in scope
Unregulated buy-to-let contracts or commercial lending is not in scope

Question 21

2.2.1 When does Consumer Duty not apply to products or services?

Answer 21

When they have not been designed for retail customers
- they are only marketed and approved for distribution to non-retail customers
- not provided to another firm under an arrangement (i.e. distribution agreement) between them as part of a distribution chain for a retail product or service

Question 22

2.2.1 When does the Consumer Duty apply to wholesale firms? (4)

Consumer Duty is applied proportionately, meaning a firm which is remote from retail customers, with no direct client relationship, will have limited obligations

Answer 22

When they could influence or determine material aspects of the following:
- the design or operation of retail products or service, including their price and value
- the distribution of retail products or services
- preparing and approving communications that are to be issued to retail customers
- engaging in customer support for retail customers

Question 23

2.2.1 Which ‘wholesale’ activities are excluded from the Consumer Duty? (6)

Answer 23

• Manufacture of products or services only for wholesale purposes, where they meet the conditions in the ‘retail market business’ definition - includes financial instruments which are intended to be traded in a regulated market/trading venue
• Activities relating to non-retail financial instruments - minimum denomination/investment of £50,000
• Market activities for certain financial instruments meeting the criteria in the ‘retail market business’ definition
• Activities relating to insurance contracts of large risks for commercial customers or where the risk is located outside of the UK
• Activities connected to the distribution of group insurance policies or the extension of these policies to new members
• The regulated activity of administering a benchmark, any ancillary activity to that activity and any activities undertaken by a benchmark admin for the purpose of complying with the Benchmarks Regulation

Question 24

2.2.1 Who does The Consumer Principle (principle 12) apply to?

Answer 24

Firms who are in scope of the Consumer Duty. Where the new principle applies, then Principle 6 (Customers interests) and Principle 7 (Communications with clients) will no longer apply to firms in respect of the service and product that they are providing to retail customers

Firms not subject to the Consumer Duty will continue to ensure adherence to Principles 6 and 7

Question 25

2.2.1 What do the ‘Cross-Cutting’ rules require firms to do in regards to retail customers? (3)

Answer 25

• Act in good faith towards retail customers - standard of conduct characterised by honesty, fair and open dealings. Firms should consider this rule at the product or service design stage
• Avoid foreseeable harm to retail customers - firms must ensure that retail customers understand and accept the inherent risks of products
• Enable and support retail customers to pursue their financial objectives - conclusion reached by firms will depend on the products or services requested/purchased by retail customers. Firms are not responsible for customers making their own decisions but they must be clear and transparent when providing material and info

Question 26

2.2.1 What are the ‘Good’ outcomes the FCA expects to see? (4)

Answer 26

Products and Services Outcome
Price and Value Outcome
Consumer understanding outcome
Consumer support outcome

Question 27

2.2.1 What is the ‘Good’ Products and Services Outcome? (2)

Answer 27

• The FCA expects all products and services for customers to be for a purpose designed to meet the needs and objectives of a target group
• The Consumer Duty interacts with the requirements set out in the Product and Intervention and Product sourcebook (‘PROD’), with regards to manufactures and distributors of products

Question 28

2.2.1 What is the ‘Good’ Price and Value Outcome? (2)

Answer 28

• The price of products represents a ‘fair’ value for customers in the target market/group. Value is not just the price paid by the customer for a product or service sold by a firm
• The firm must ensure that there is a relationship between the price paid and the benefit that the customer receives from it

Question 29

2.2.1 What is the ‘Good’ Consumer understanding outcome? (3)

Answer 29

• It is important that firms’ comms are fair, clear and not misleading, so that customers can make informed decisions about products and services
• Firms must present the information in a manner that will be understood by customers - firms need to understand the ‘financial awareness’ of the target market
• Firms need to consider who the target market is and use this to design their marketing material and info

Question 30

2.2.1 What is the ‘Good’ Consumer support outcome? (1)

Answer 30

• Firms must provide support that meets the needs of their customers throughout their relationship

Question 31

2.2.1 Which Individual Conduct rule applies to firms not covered by the Consumer Duty and Individual Conduct Rule 6?

Answer 31

Individual Conduct Rule 5

Question 32

2.2.1 What expectations do the FCA have of firms under the Consumer Duty in paragraph 1.9 of FG22/5? (10)

Answer 32

• Put consumers at the heart of their business and focus on delivering good outcomes for customers
• Provide products and services that are designed to meet customers’ needs, that they know provide fair value, that help customers achieve their financial objectives, and which do not cause them harm
• Communicate and engage with customers so that they can make effective, timely, and properly informed decisions about financial products and services and can take responsibility for their actions and decisions
• Not seek to exploit customers’ behavioural biases, lack of knowledge, or characteristics of vulnerability
• Support their customers in realising the benefits of the products and services they buy and acting in their interests without unreasonable barriers
• Consistently consider the needs of their customers and how they behave, at every stage of the product/service lifecycle
• Continuously learn from their growing focus and awareness of real customer outcomes
• Ensure that the interests of their customers are central to their culture and purpose and are embedded throughout the organisation
• Monitor and regularly review the outcomes that their customers are experiencing in practice and take action to address any risks to good customer outcomes
• Ensure their board or equivalent governing body takes full responsibility for ensuring that the Duty is properly embedded within the firm

Question 33

2.2.2 What are the 6 consumer outcomes that the FCA believes the FTOC should mean and do for their consumers?

Answer 33

1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture
2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly
3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
4. If consumers receive advice, the advice is useful and takes account of their circumstances
5. Consumers are provided with product that perform as firms have led them to expect, and the associated service if both of an acceptable standard and as they have been led to expect
6. Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch providers, submit a claim or make a complaint

Question 34

2.3 What does the FCA consider the 4 drivers of culture?

Answer 34

1. Leadership - includes the tone set from the very top of the firm and how effectively that cascades through the organisation
2. People policies - in particular the type of behaviour that are incentivised and disincentivised within the firm, and how this is done. e.g. remuneration, progression, promotion, recruitment, diversity and inclusion, speak-up culture and psychological safety
3. Governance - how decisions are made within a firm
4. Purpose - combination of the business model and the way in which it thinks about the social or economic contribution it provides

Question 35

2.3 Who does the PRA’s conduct rules apply to? (4)

Answer 35

All individual who are approved by the PRA or the FCA as senior managers, who fall within the PRA’s certification regime, are key function holders, or are NEDs in dual-regulated firms

Question 36

2.3 Who does the FCA Conduct Rules apply to? (5)

Answer 36

• All individuals approved by the FCA (or PRA) as senior managers who carry out senior management functions (SMFs)
• All individuals covered by the FCA or PRA’s certification regime
• An employee of an SM&CR firm who has been appointed to an SMF role on a temporary or reasonably unforeseen basis and for up to 12 weeks to provide cover during the absence
• Other employees - excluding ancillary staff who perform a role unrelated to the financial services (such as receptionist, post room staff, cleaners), and
• A board director of a UK SM&CR

Question 37

2.3 What are the Conduct Rules set out by COCON 4.1 and COCON 4.2? (6)

COCON is Code Of Conduct
Note that individuals working for a firm where the Consumer Duty applies will have to adhere to rule 6 for FCA only firms. In this case, rule 4 will cease to apply

Answer 37

1 - you must act with integrity
2 - you must act with due skill, care an diligence
3 - you must be open and cooperative with the FCA, the PRA and other regulators
4 - you must pay due regard to the interests of the customer and treat them fairly
5 - you must observe proper standards of market conduct
6 - you must act to deliver good outcomes for retail customers

Question 38

2.3 What are the Senior Manager Conduct Rules?

Answer 38

1 - you must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
2 - you must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant reqs and standards of the regulatory system
3 - you must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
4 - you must disclose appropriately any information of which the FCA or PRA would reasonable expect notice

Question 39

2.3 Which rules are NEDs subject to?

Answer 39

The FCA Individual Conduct Rules set out in COCON 2.1 and to SC rule 4 (unless they also fulfil one of the other categories of SC rules staff)

Question 40

2.3 What standard does COCON 4.4. state the FCA expect a NED to provide for care, sill and diligence?

Answer 40

One that would be exercised by a reasonably diligent person with
1. the general knowledge and experience that may reasonably be expected of a person carrying out the functions which would normally be undertaken by an NED in relation to the firm, taking into account the standards in the Handbook (especially COCON and DEPP) and,
2. the general knowledge, skill and experience that the NED has

Question 41

2.3 What context does the COCON 3.1 say the FCA will consider when a course of conduct was undertaken by an individual?

Answer 41

• the precise circumstances of the individual case
• the characteristics of the particular function performed by the individual in question
• the behaviour expected in that function

Question 42

2.3 When is a person personally culpable for breaching code of conduct?

Answer 42

• a person’s conduct was deliberate
• the person’s standard of conduct was below that which would be reasonable in all the circumstances

Question 43

2.3.1 What does the statements of principle for approved persons state they must do for all functions? (4)

Answer 43

1. Act with integrity in carrying out their accountable function
2. Act with due skill, care and diligence in carrying out their accountable function
3. Observe proper standards of market conduct in carrying out their accountable function
4. Deal with the FCA and with other regulators in an open and cooperative way and disclose appropriately any info with which the FCA would reasonable expect notice

Question 44

2.3.1What does the statements of principle for approved persons state they must additionally do for Significant Influence Functions (SIFs)? (3)

Answer 44

5. Take reasonable steps to ensure that the business of the firm for which they are responsible in their accountable function is organised so that it can be controlled effectively
6. Exercise due skill, care and diligence in managing the business of the firm for which they are responsible in their accountable function
7. Take reasonable steps to ensure that the business of the firm for which they are responsible in their accountable function complies with the relevant requirements and standard of the regulatory system

Question 45

2.3.2 What does the FCA consider a failure to comply with the requirement of integrity for an authorised person? (9)

Code of practice for statement of principle 1

Answer 45

1. Deliberately misleading (or attempting to mislead) a client, the firm (including the firm’s auditors or appointed actuary) or the FCA by either act or omission
2. Deliberately recommending an investment to a customer, or carrying out a discretionary transaction for a customer, if the approved person knows that they are unable to justify its suitability for that customer
3. Deliberately failing to inform a customer, the firm (or its auditors or appointed actuary), or the FCA of the fact that their understanding of a material issue is incorrect
   
   • disclose the existence of falsified documents
   • rectify mismarked positions immediately
4. Deliberately preparing inaccurate or inappropriate records or returns in connection with an accountable function
5. Deliberately misusing the assets or confidential information of a client or the firm
6. Deliberately designing transactions so as to disguise breaches of requirements and standards of the regulatory system
7. Deliberately failing to disclose the existence of a conflict of interest in connection with dealings with a client
8. Deliberately not paying due regard to the interests of a customer
9. Deliberate acts, omissions or business practices that could be reasonably expected to cause consumer detriment

Question 46

2.3.2 What counts as misleading a client, the firm or the FCA?

Answer 46

• Falsifying documents
• Misleading a client about the risks of an investment
• Misleading a client about the charges or surrender penalties of investment products
• Misleading a client about the likely performance of investment products by providing inappropriate projections of future investment returns
• Misleading a client by informing them that products only require a single payment when that is not the case
• Mismarking the value of investments or trading positions
• Procuring the unjustified alteration of prices on illiquid or off-exchange contracts
• Misleading others within the firm about the creditworthiness of a borrower
• Providing false or inaccurate documentation or information, including details of training, qualifications, past employment record, or experience
• Providing false or inaccurate information to the firm (or to the firm’s auditors or appointed actuary)
• Providing false or inaccurate information to the FCA
• Destroying, or causing the destruction of, documents (including false documentation) or tapes or their contents relevant to misleading (or attempt to mislead) a client, the firm, or the FCA
• Failing to disclose dealings where disclosure is required by the firm’s personal account dealing rules, and
• Misleading others in the firm about the nature of risks being accepted

Question 47

2.3.2 What counts as deliberately preparing inaccurate or inappropriate records or returns in connection with an accountable function? (3)

Answer 47

• Performance reports for transmission to customers which are inaccurate or inappropriate (e.g. by relying on past performance without giving appropriate warnings)
• inaccurate training records or details of qualifications, past employment records, or experience, and
• inaccurate trading confirmations, contract notes, or other records of transactions or holdings of securities for a customer, whether or not the customer is aware of these inaccuracies or has requested such record

Question 48

2.3.2 What is deemed to be deliberately misusing the assets or confidential information of a client or the firm? (7)

Answer 48

• Front-running client orders (ie, handling the firm’s own orders before those of its client, or before the firm’s broker recommendations are released to clients, so as to benefit from price movements that may arise from client dealing activity)
• Carrying out unjustified trading on client accounts to generate a benefit to the approved person (sometimes known as ‘churning’)
• Misappropriating a client’s assets, including wrongly transferring cash or securities belonging to clients to personal accounts
• Wrongly using one client’s funds to settle margin calls or to cover trading losses on another client’s account or on firm accounts
• Using a client’s funds for purposes other than those for which they are provided
• Retaining a client’s funds wrongly, and
• Pledging the assets of a client as security or margin in circumstances where the firm is not permitted to do so

Question 49

2.3.3 What does the FCA consider a failure to comply with the requirement for an authorised person to act with due skill, care and diligence in carrying out their controlled function? (8)

Code of Practice for Statement of Principle 2

Answer 49

1. Failing to inform a customer or the firm (or the firm’s auditors or appointed actuary) of material information in circumstances where they were aware, or ought to have been aware, of such information and the fact that they should provide it
2. Recommending an investment to a customer, or carrying out a discretionary transaction for a customer, where they do not have reasonable grounds to believe that it is suitable for that customer
3. Undertaking, recommending, or providing advice on transactions without reasonable understanding of the risk exposure of the transaction to the customer. For example, recommending transactions in investments to a customer without a reasonable understanding of the liability of that transaction
4. Undertaking transactions without a reasonable understanding of the risk exposure of the transaction to the firm. For example, trading on the firm’s own account without a reasonable understanding of the liability of that transaction
5. Failing without good reason to disclose the existence of a conflict of interest in connection with dealing with a client
6. Failing to provide adequate control over a client’s assets, such as failing to segregate a client’s assets or failing to process a client’s payments in a timely manner
7. Continuing to perform a controlled function despite having failed to meet the standards of knowledge and skills as required by the FCA
8. Failing to pay due regard to the interests of a customer without good reason

Question 50

2.3.3 What are examples of failing to inform a customer or the firm (or the firm’s auditors or appointed actuary) of material information in circumstances where they were aware, or ought to have been aware, of such information and the fact that they should provide it? (5)

Answer 50

• Failing to explain the risks of an investment to a customer
• Failing to disclose details of the charges or surrender penalties of investment products
• Mismarking trading positions
• Providing inaccurate or inadequate information to the firm, its auditors, or appointed actuary
• Failing to disclose dealings where disclosure is required by the firm’s personal account dealing rules

Question 51

2.3.4 What does Statement of Principle 3 require?

Answer 51

An approved person to observe proper market conduct in carrying out their accountable function.

Usually interpreted as compliance with UK MAR

Question 52

2.3.5 What kinds of behaviours does the FCA consider failing to comply with Statement of Principle 4? (2)

(Openness and cooperation with the FCA and other regulators and disclosure of any info with which the FCA would expect notice)

Answer 52

1. Failing to report promptly in accordance with their firm’s internal procedures (or, if none exists, direct to the FCA) information which it would be reasonable to assume would be of material significance to the FCA, whether in response to questions or otherwise
2. Failing without good reason to:
   - inform a regulator of info of which the approved person was aware in response to questions from the regulator
   - attend an interview or answer questions put by a regulator, despite a request or demand having been made, and
   - supply a regulator with appropriate documents or information when requested or required to do so and within the time limited attaching to that request or requirement

Question 53

2.4.2 What principles are the FCA’s overall approach to supervision based on? (8)

Answer 53

1. Forward-looking
2. Strategy and business models
3. Culture and governance
4. Individual and firm accountability
5. Proportionate and risk based
6. Two-way communication
7. Coordinated - between the supervision team and those in other FCA departments to share intelligence with other regulatory bodies
8. Put right systematic harm that has occurred and stop it from happening again

Question 54

2.4.2 How does the FCA approach risk diagnosis, monitoring and prevention? (2)

Answer 54

1. it is the responsibility of a firm’s management to organise and control the firm effectively and maintain adequate risk management systems, with the ultimate aim of acting in compliance with its regulatory requirements
2. the FCA will attempt to balance any burden or restriction placed on firms with the benefits that are likely to result (take proportionate action)

Question 55

2.4.1 What are the 4 heading of the tools of supervision?

Answer 55

Identify
Diagnose
Remedy
Evaluate

Question 56

2.4.2 What are the two key features of the outcomes-focused intensive supervision model?

Answer 56

1. Enhanced analysis and risk identification capacity which focuses on business model risk and interacts with macroprudential analysis
2. Greater focus on outcome testing rather than ensuring that firms have the appropriate systems and controls

Underpinning these is also greater scrutiny of senior management competence

Question 57

2.4.3 What does the risk-based approach mean?

Answer 57

The FCA assesses individual firms for the risk each one presents to the regulator’s objectives

Question 58

2.4.3 How will the FCA monitor ongoing compliance?

Answer 58

• Desk-based reviews
• liaison with other agencies or regulators
• meetings with management and other representatives of a firm
• on-site inspections
• reviews and analysis of periodic returns and notifications
• reviews of past business
• TM
• use of auditors
• use of skilled persons

Question 59

2.4.3 How does the FCA address specific risks identified in firms? (4)

Answer 59

• making recommendations for preventative or remedial action
• giving other individual guidance to a firm
• imposing individual requirements
• varying a firm’s permission in another way

Question 60

2.5 What are the requirements imposed by the FCA on directors and senior managers of authorised firms?

Answer 60

1. Senior management responsibility
2. Effective organisation and control - Principle for Business 3
3. Apportionment of responsibility - everyone knows who has which responsibility
4. Common standards

Question 61

2.5 What is SYSC 5.1.5AB R?

SYSC is Senior Management Arrangements, Systems and Controls

Answer 61

A firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them

Question 62

2.5.2 How long must a firm keep a record of an old ‘record of apportionment’ after the old one has been superseded by a more up-to-date record?

Answer 62

6 years

Question 63

2.5.5 What types of internal control mechanisms should a firm have?

Answer 63

Sound administrative and accounting procedures for effective control
Safeguard arrangements for information systems

Question 64

2.5.11 How long must records of business and internal organisations, including all services and transactions undertaken by them, be kept?

Answer 64

Must be kept for at least 5 years if they relate to MiFID business
Must be kept for at least 3 years for non-MiFID business

Question 65

2.6 What are the two types of Controlled Functions (CFs) listed in the FCA handbook?

Answer 65

1. FCA governing functions - for directors and partners of a company in title or in action
2. Customer-dealing function

Question 66

2.6.1 In which situations must a firm immediately notify the appropriate regulator? (4)

Answer 66

1. The firm failing to satisfy one or more of the threshold conditions (as set out in the FSMA)
2. Any matter which could have a significant adverse impact on the firm’s reputation
3. Any matter which could affect the firm’s ability to continue to provide adequate services to its customers and which could result in serious detriment to a customer or the firm
4. Any matter in respect of the firm which could result in serious financial consequences to other firms or to the UK financial system

Question 67

2.7 What are the main traits that the FCA tests to see if a person is suitable for approval or continuing their duties? (3)

Answer 67

• Honesty, Integrity and reputation
• competence and capability
• financial soundness

Question 68

2.7.4 What did the FCA propose in its Diversity and Inclusion consultation paper (18 December 2023) to enhance SM&CR?

Answer 68

To provide additional guidance on ‘non-financial’ misconduct

‘Non-financial’ can include serious instances of bullying, harassment and similar behaviour towards fellow employees and employees of group companies and contractors

Question 69

2.7.4 What did the PRA propose in its Diversity and Inclusion consultation paper (18 December 2023) to enhance SM&CR?

Answer 69

All firms should appoint an individual (who is an SMF) to be responsible for the firm’s development and implementation (D&I) as a prescribed responsibility

Question 70

2.8 What is the purpose of the Parliamentary Commission for Banking Standards (PCBS)?

Answer 70

To recommend how to improve standards in the banking sector

Their main recommendations were to introduce a new accountability framework which focuses on the accountability of senior management, and for firms to take more responsibility for employees being fit and proper

Question 71

2.8 When did the SM&CR come into effect for different approved persons?

Answer 71

2016 - banks, insurance companies, including foreign branches of non-EEA banks
2018 - Solvency II firms (including the Society of Lloyds, managing agents, incoming branches of non-UK firms and insurance special purpose vehicles (ISPVs)), non-directive firms (insurers outside the scope of Solvency II) and small run-off firms
2019 - FCA solo-regulated firms and claims management companies

Question 72

2.8 What elements does the SM&CR comprise of? (3)

Answer 72

1. The Senior Managers Regime (SMR) for individuals who are subject to regulatory approval, which requires firms to allocate a range of responsibilities to these individuals and to regularly vet their fitness and property
2. A Certification Regime which will require relevant firms to assess the fitness and propriety of certain employees who could pose a risk of significant harm to the firm or any of its consumers
3. A set of Conduct Rules which will apply to the majority of individuals at firms (with few exceptions), with additional Conduct Rules applying to individuals who are subject to Senior Managers Regime

Question 73

2.8 Does the Senior Manager Regime (SMR) capture overseas individuals making decisions for foreign banks?

Answer 73

No, they will only consider the individual implementing the policies on a UK-branch level

Question 74

2.8 What are the First Tier of Individual Conduct Rules for FCA and PRA governed persons? (3)

Answer 74

1. You must act with integrity
2. You must act with due skill, care and diligence
3. You must be open and cooperative with the FCA, PRA and other regulators

Question 75

2.8 What are the additional Individual Conduct Rules, applying to FCA governed persons only? (3)

Answer 75

4. You must pay due regard to the interests of customers and treat them fairly
5. You must observe proper standards of market conduct
6. You must act to deliver good outcomes for retail customers

Question 76

2.8 What are the second tier - Senior Manager Conduct Rules - that apply to FCA and PRA governed persons? (4)

Answer 76

SM1 - You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
SM2 - You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with relevant reqs and standards of the regulatory system
SM3 - You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
SM4 - You must disclose appropriately any information of which the FCA or the PRA would reasonably expect notice

Question 77

2.8.1 What is the deadline for a firm to the FCA after an approved person stops performing their duties?

Answer 77

7 business days but they must notify the FCA as soon as they become aware that they will submit a form

This notification may come via phone, email or fax

Question 78

2.8.1 What is the deadline for a firm to the FCA after an approved person stops performing their duties under the SM&CR?

Answer 78

10 business days

Question 79

2.9 Which section of the FSMA requires firms to provide the FCA with specific info or documents to support its supervisory and enforcement functions?

Answer 79

S.165

Question 80

2.9 What power does section 166 of the FSMA give to the FCA?

Answer 80

To require a firm and certain other persons to provide a report by a skilled person, or for a skilled person to collect or update information. This may be used to support either its supervision or enforcement functions.

A skilled person is an independent person appointed to the FCA’s skilled persons panel; typically a consultancy or accountancy firm. Whether the FCA or the firm selects the skilled person, they do so from an approved panel

Question 81

2.9 What power does section 167 of the FSMA give to the FCA?

Answer 81

If the FCA has general concerns about the conduct or state of affairs of a firm or appointed representative, it may appoint investigators

These investigators will depend on the issue being investigated - usually they are solicitors or accountants

Question 82

2.9 What power does section 168 of the FSMA give to the FCA?

Answer 82

If the FCA has concerns about any person, such that it considers that specific regulatory breaches have occurred, it may appoint investigators

This includes where a person may be guilty of an offence under S.177/191 (failing to cooperate with the FCA) or S.398(1)(misleading the FCA)
An offence may have been committed under S.24(1) (false claim to be authorised or exempt); or Part 7 S.89-95 of the FSA 2012 (misleading statement and impressions)
There may have been a breach of the general prohibition of regulated activities or a contravention of S.21 or S.238 of FSMA (restrictions on financial promotions)

Question 83

2.10 What is the FCA’s approach to tackling serious misconduct? (5)

Answer 83

• investigate fairly and efficiently, including acting where there is serious misconduct
• use deterrent and remedial powers, including financial penalties, prohibitions, suspensions as well as redress, or remedial and restorative measures wherever appropriate, to put things right
• encourage firms to voluntarily account for and redress misconduct by imposing lower sanctions on such firms
• impose more severe sanctions on those who fail to address harm once they have identified misconduct
• communicate, through statutory notices, the basis and the reasons for actions taken

Question 84

2.10 What are the two sections within the block of the FCA handbook called Regulatory Processes?

Answer 84

1. The Supervision (SUP) manual sets out the relationship between the FCA and persons that are already authorised
2. The Decision Procedure and Penalties (DEPP) manual deals with the FCA’s procedures for taking various disciplinary actions

Question 85

2.10 What does the Perimeter Guidance (PERG), in the regulatory guides block of the FCA Handbook, give guidance for?

Answer 85

The circumstances in which authorisation is required, or where exempt person status is available, including guidance on the activities which are regulated under the Act and the exclusions which are available

Question 86

2.10 What does the Enforcement Guide (EG) set out?

Answer 86

The FCA’s approach to how it exercises the main enforcement powers it has, both under FSMA and under the Unfair Contract Terms regulations

Question 87

2.10.1 What types of statutory notice are the FCA allowed to issue to authorised firms and/or approved persons? (3)

Answer 87

• Warning notices
• Decision notices
• Supervisory notices

Question 88

2.10.1 What is a warning notice?

Answer 88

Gives details about any action the FCA proposes to take and why it proposes to do so. They also give the recipient the right to make representations as to why the FCA should not take this action

Question 89

2.10.1 What is a decision notice?

Answer 89

Gives details of the action that the FCA has decided to take, leaving room for appeal by the recipient

Question 90

2.10.1 What is a supervisory notice?

Answer 90

Gives details of the supervisory action that the FCA has taken, or proposes to take. These notices need to be preceded by the issue of a warning notice or decision notice, and they are also published by the FCA.

A typical supervisory notice might limit a firm’s Part 4 permission (authorisation) with immediate effect. Hence it would seem reasonable for the FCA to alert the public to the fact that the firm is not longer permitted to carry on certain activities

Question 91

2.10.1 What further notices can the FCA issue, that aren’t considered statutory? (3)

Answer 91

• Further decision notice
• Notice of discontinuance
• Final notices

Question 92

2.10.5 What factors does the FCA consider when they impose financial penalties?

Answer 92

• if the firm or person avoided a loss, or made a profit from their breach, a financial penalty is more appropriate to prevent the guilty party from its actions
• If the breach or misconduct is more serious in nature or degree, a financial penalty is likely to be imposed
• Admission of guilt, full and immediate cooperation, and taking steps to ensure that consumers are fully compensated may lessen the likelihood of financial penalty
• A poor disciplinary record or compliance history may increase the likelihood of a financial penalty, as a deterrent for the future
• Whether the firm has followed the regulator’s guidance

Question 93

2.10.5 When will the FCA decide against issuing a press release of a financial penalty on a firm?

Answer 93

In circumstances where it would be unfair on the person, or prejudicial to the interests of consumers

Question 94

2.10.6 What is Section 56 of the FSMA?

Answer 94

Gives the FCA the power to issue a prohibition order

Question 95

2.10.6 What is Section 71 of the FSMA?

Answer 95

Gives a private individual the power to sue if they suffer loss as a result of a breach of any of sections 56(6), 59(1), or 59(2)

Question 96

2.10.6 What is Section 56(6) of the FSMA?

Answer 96

Involves a firm allowing an individual to act in contravention of a prohibition order

Question 97

2.10.6 What is Section 59(1) of the FSMA?

Answer 97

Involves a firm allowing an individual to carry on a controlled function as part of that firm’s regulated activities, without the appropriate approved person status

Question 98

2.10.6 What is Section 59(2) of the FSMA?

Answer 98

Involves a firm allowing an individual to carry on a controlled function under an arrangement with a contractor, without the appropriate approved person status

Question 99

2.10.6 What are Sections 382-384 of the FSMA?

Answer 99

Gives the FCA the power to require restitution where certain breaches of FSMA have occurred

Question 100

2.11 How long does an individual or firm have to refer a decision notice to the Upper Tribunal before the FCA can enact its decision?

Answer 100

28 days from the receipt of the notice